The bank should not have been called «Keremet,» but rather «Zhaman Karma Bank» – a bank of bad karma. It seems that, much like the statue of the Commander in Moliere’s renowned comedy, the ghost of Mikhail Nadel haunts the institution, sabotaging its operations as revenge for his expulsion from Kyrgyzstan.
Barely had the news from last December faded – that the money of influential individuals had been stolen from Keremet, leading to the arrest of several bank managers and even an SCNS officer involved in covering up the scheme – when a new crisis struck the bank. Now, security forces suspect that the funds injected into the National Investment Bank for Rescue and Development between 2018 and 2020 are tied to a criminal case, resulting in the arrest of several former top managers of the National Bank.
This is all happening amid ongoing negotiations (according to Ekonomika sources) to sell the bank to a strategic buyer.
The situation is, to say the least, perplexing. If a verdict is reached within the scope of the criminal case that deems the investment of money in the bank unlawful, it is only one step away from nullifying the National Bank’s relevant actions. How can the bank be sold under such circumstances? Would a rational buyer purchase shares from the National Bank when their very presence is under legal scrutiny? However, the issue with Keremet Bank runs much deeper.
We have chosen to recount the story of how the national banking regulator ended up injecting money into an ordinary commercial bank.
A Complicated History
Keremet Bank has a complicated past. It was once part of the infamous AsiaUniversalBank (AUB), which, alongside two other banks, Issyk Kul and Manas, grew between 2005 and 2010 into a colossal financial transit business controlled by President Bakiyev’s family and business associates. In 2010, AUB was forcibly taken from its owners in what was called «nationalization» during the revolutionary months of that year. A substantial financial void was discovered within the bank, leading to its division into a bankrupt bank and a «healthy» one. Over the next few years, the Agency for Bank Reorganization and Debt Restructuring (DEBRA) oversaw AUB’s bankruptcy while simultaneously attempting to auction off the «healthy» bank, named «Zalkar.»
Zalkar Bank was only successfully sold on the fifth attempt (in spring 2013) after a significant reduction in the initial asking price. The buyer was the Investment and Trading Business Holding of Russian banker Vladimir Gudkov, who at the time controlled the sizable Investtorgbank in Russia. Why did it take five attempts? Even the «healthy» bank had a considerable potential shortfall (due to low-quality loans), and the Kyrgyz authorities prohibited the bank’s buyer from reducing the extensive network of branches, despite the fact that many of them were consuming funds, disbursing loans to friends, and generally burdening the head office’s business operations.
According to our sources, the new owner of the AUB fragment received certain guarantees at the highest level of Kyrgyzstan’s leadership. As a result, Gudkov was able to establish a business similar to his Russian Investtorgbank with Zalkar (which was immediately renamed Rosinbank) – withdrawing large sums of money from Russia. This transit business, which attracted considerable criticism when AUB was involved in it, continued as long as Gudkov didn’t reduce branches and didn’t express concerns about the «hole» in the assets he inherited.
Focusing on transit schemes instead of developing a traditional banking business ultimately cost Gudkov his enterprise and, later, his freedom. On August 27, 2015, the Russian Central Bank imposed temporary administration on Investtorgbank. The Kyrgyz bank began to experience difficulties almost immediately afterward. According to our source, this was because part of Rosinbank’s liquidity (several million dollars) had been placed with Investtorgbank in an attempt to plug a hole shortly before the Central Bank of Russia intervened.
Despite its owner’s troubles, Rosinbank remained afloat for quite some time. Ekonomika is aware that Vladimir Gudkov (who fled Russia following a criminal investigation launched after his bank’s collapse) promptly started searching for a buyer for Rosinbank, realizing that he could no longer maintain it by himself. The bank’s liquidity was still supported by transit schemes, so its financial issues were not immediately apparent.
Simultaneously, Gudkov transferred the bank’s shares from his holding company (which by that time had been targeted by a Russian claim for subsidiary liability, thus risking the loss of its Kyrgyz asset) to a group of nominal owners, each holding a share below the National Bank’s control threshold (10%).
However, there were no takers for the bank. A banker directly familiar with the matter informed Ekonomika that potential buyers were deterred by the size of the possible «hole» in the bank’s balance sheet, which was estimated to be between $5 and $10 million. Ekonomika cannot independently confirm or refute this assessment – we only note that the lower limit of this estimate corresponds to the amount of funds directed to rescue the bank by the National Bank of the Kyrgyz Republic at the end of summer 2018.
The search for buyers continued until mid-2018 when the bank’s problems became difficult to overlook. At the end of May 2018, Andrei Goikhman, who played a crucial role in the bank, was arrested in Bishkek. The media reported that the criminal case, among other things, concerned the illegal return of large sums of VAT from the Kyrgyzstan budget. It is quite possible that some part of the «scheme» calculations were carried out through Rosinbank, which often facilitated the presentation of fraudulently inflated VAT for reimbursement.
By this time, Vladimir Gudkov had already been arrested in Monaco, following Russia’s request for his extradition (in Russia, he was accused of embezzling 7 billion rubles). In June 2018, the Prince of Monaco refused to extradite the banker to Russia, and he was released.
Immediately after Rosinbank’s acquisition in 2013 by the Investtorgbank group, money transit schemes from Russia were initiated. The bank worked in conjunction with its Russian sister bank and other banks. Money was transferred from Russia to Rosinbank under various contracts (not always legitimate), and from Kyrgyzstan, it was distributed to the personal «piggy banks» of Russian businessmen and suppliers of imported goods from China, the United Arab Emirates, Turkey, and other countries.
The Kyrgyz Financial Police later labelled these schemes as money laundering, even though they bear no resemblance to traditional money laundering — nothing is being legalized. Instead, this is a typical flight of capital from a country experiencing economic distress, where businesses face increasing pressure from security forces, and the only way to protect their savings from power raiding is to move them abroad. Some of the schemes involve payments for real imports channelled through shell companies.
The issue with the transit business of Russian origin is that Russian authorities view it as a significant threat to the state and are trying to stop it in every possible way. Since 2014, a specific article in the Criminal Code of Russia has separately criminalized the withdrawal of funds from Russia on a fictitious basis (Article 193.1. Performing foreign exchange operations to transfer funds in foreign currency or the currency of the Russian Federation to non-resident accounts using false documents).
In a civilized country with no currency restrictions, such an article is nonsensical. It is not in our Criminal Code either: Kyrgyzstan rightfully takes pride in the absence of currency control and the freedom of capital movement, enshrined in law. Russia, on the other hand, must plug all possible holes in currency leakage, including with threats of criminal prosecution.
Since 2014, our country have been receiving inquiries about Rosinbank’s transit operations from Russia. Agents of the Russian security forces were dispatched. As stated in May 2018 by the State Service for Combating Economic Crimes (Finpol), according to their information, «fictitious accounts» have been operating in the bank since 2014, to which funds were transferred from Russia.
At the suggestion of the Russian security forces, their Kyrgyz counterparts, sensing a lucrative financial topic, initiated criminal cases on these operations several times. The bank fought back vigorously, and business was suspended on multiple occasions. (Strictly speaking, we doubt that transit operations for foreign capital violate our country’s criminal law). Regardless, by 2018, the criminal prosecution of the bank had become an established fact, and at the end of May, the Financial Police decided, for some reason, to make it public.
Following the public announcement of the criminal cases, the outflow of money from the bank increased, and its collapse became a matter for the near future.
Salvation before the presidential election
The liquidation of several Latvian banks in 2017–2018 and the subsequent panic withdrawal of funds from Latvia somewhat kept Rosinbank afloat. Ekonomika has learned from multiple sources that Rosinbank actively attracted offshore companies that had fled Latvia in order to support their liquidity with these funds. (The owners of the companies themselves were unaware of the true purpose of such flexibility from the bank). However, even these measures could not stave off the inevitable liquidity crisis at the bank.
By the end of June, some customers were no longer able to withdraw large amounts from the bank, and the office was consistently crowded with accountants from the served companies trying to negotiate the withdrawal of at least some of their account balances.
The National Bank had two options for resolving this situation. The first and most obvious one was to revoke Rosinbank’s license and hand it over to DEBRA for liquidation. In this scenario, many depositors and businesses would lose their money, and the size of the «hole» in the bank would grow significantly. Corporate borrowers would seek all possible ways to avoid repaying loans to a bankrupt bank, and the bank’s assets would be sold at a «fire sale» price.
The National Bank chose the second option — to save the bank with its own funds. In August 2018, the bank was given an urgent loan of 300 million soms (approximately $3.5 million) to support current liquidity. To secure this loan, the owners of 71.66% of the bank’s shares pledged them to the National Bank, simultaneously agreeing to give them immediately in the form of compensation to avoid complicating the procedure.
On October 2, 2018, 71.66% of the shares were transferred to the National Bank.
For Rosinbank’s clients, its transition under the state’s wing was a salvation. The country also avoided massive protests by depositors who lost their money. However, the chairman of the National Bank, Tolkunbek Abdygulov, had to strenuously explain his decision to parliament regarding this deal.
A Bank bailout is like a trap
Deputy Dastan Bekeshev was the main critic of the deal with Rosinbank shares. His primary concern, expressed in parliament, was that the National Bank issued a loan of 300 million, knowing that Rosinbank would not be able to repay it. He also questioned whether the shares received by the National Bank were truly worth 300 million at the time of the transaction.
Tolkunbek Abdygulov, in response, explained that rescuing struggling banks with the funds of the national regulator is a common practice in developed countries (which is true). He also stated that the National Bank would soon begin measures to improve the bank in order to eventually sell it to a commercial buyer.
According to our information, there was indeed interest in Rosinbank as a banking license with an established business from several potential buyers, both domestically and internationally. However, at that time, everyone was deterred by a tax claim for 1.4 billion soms, which arose based on the materials of criminal investigations against the bank. This is another example of the classic schizophrenia of the Kyrgyz power economy: the «crooked» criminal case against bank managers gave rise to far-fetched tax claims, which ultimately prevented the bank from being sold to a suitable buyer.
It should be noted that the non-payment of taxes, which initially amounted to 489,153, 201 soms and later increased to 1,444 ‚668,144 soms with penalties and sanctions, was then recalculated to a balance of 28,959,162 soms, plus a penalty of 4,195,451 soms.
In 2018, the state faced a choice: either let the bank go bankrupt or bail it out. It is important to remember that when this decision was made (August 2018), President Atambayev was preparing for a presidential election where his preferred candidate was standing (October 2018). Allowing the bank to fail would have meant upsetting a large number of customers, employees, and owners during a politically active season (autumn) and just before the elections.
In the end, the authorities made the only justified decision for themselves — not to shake the situation, and therefore take the bank from the burnt-out Russian financier onto the state’s balance. As a result of this operation, the National Bank acquired a little more than 70% of Rosinbank.
Subsequently, everything happened according to a predictable logic. Having married the bank, the state now had to love, take care of, and forgive its weaknesses. The 300 million issued in 2018 was barely enough to pay off the most persistent clients who wanted to withdraw their money before Jeenbekov’s election. The real hole in the bank had to be filled with capital further, which is now being blamed on the then managers of the National Bank.
In 2018, 800 million soms were poured into Rosinbank, in 2019 — 3.2 billion soms, and in 2020 — 4.2 billion soms. All these funds were used to close the holes formed in previous years due, on one hand, to the leaky balance sheet inherited from DEBRA, and on the other hand, due to the talented management of the state bank by its top managers. In effect, part of the money allocated by the state went to pay off old theft, and part of it went to new theft.
The state’s most profitable strategy for Keremet Bank as of today may indeed be to sell it to a strategic investor. A private owner would likely monitor the bank’s credit policy and expenses more strictly than a state-appointed curator. However, there are two problems with this strategy.
First, the authorized capital of Keremet Bank, according to its financial statements as of February 28, 2023, is 8,698,746,000 soms (about $100 million). The accumulated loss is 1,898,475,000 soms, which, with other adjustments, gives a capital value of around 6.8 billion soms. By initiating the current criminal case, the state has publicly confirmed that even this amount is too high.
If we consider the «fair value» of Keremet to be in the range of 3–4 billion soms and add a premium for a banking license (around 400 million soms), the cost of Keremet for an interested market buyer cannot exceed 4.5 billion soms. However, selling the bank at that price would risk exposing anyone who signs the sale approval to a criminal case in the event of a change in power or even a shift in political balances within the current government.
The second problem is not related to the quality of management of Keremet Bank but to the Kyrgyz banking market as a whole. It’s questionable whether anyone in Kyrgyzstan would need a bank with a vast branch network at a price of even $50 million. The country has a predominantly poor population, a significant share of the informal economy, and already has twenty-three banks to serve it. It’s unclear where the growth drivers for these $50 million would come from, considering the limited market.
International players (the only real buyers for such an asset) are more interested in acquiring a smaller bank and developing it in the international segment — for example, establishing settlements for foreign trade or private banking for large foreign clients. A $50 million bank is not necessary for these purposes.
In summary, it’s unlikely that Keremet Bank will be sold in the near future. The only positive aspect is that it has at least reached operating profit, thanks to the significant influx of transactional business from abroad in 2022. The bank may find a way to work through its challenges eventually.